Something for your Espresso: Are you paying attention to USDJPY and USDCNH?
USDJPY is starting to drop very fast now after no immediate action post the rate hike from Ueda, but the remarks on the BoJ’s recognition of a weaker Yen as a driver of high prices and the absence of a cap on how high rates can go seems to have made its impact.
The USDJPY real rates model is printing at 144.43 as fair value as of the move in rates in JPY and USD this morning. Fundamentally, there is more downside left in that short trade with the market still net long, and the interesting thing now is whether it will cause victims in other assets as we saw last week.
Chart 1: USDJPY versus fair value model
USDJPY is moving substantially lower again in the aftermath of the BoJ meeting. Ueda hiked rates and prepared a QE exit, which leaves the carry trade extra vulnerable if Powell moves towards confirming market pricing.
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